What Citigroup didn't say

Commentary: investors need to go beyond company spin

HerbGreenberg

This column first was published in the weekend edition of The Wall Street Journal.

SAN DIEGO (MarketWatch) -- When companies issue news releases, sometimes what counts isn't what is said, but what isn't.

With its warning last Monday that third-quarter results will be abysmal relative to expectations, thanks largely to the mortgage meltdown, Citigroup
C, -0.59%
illustrates the point as well as any company.

Rather than go down, which would be expected when a company says that earnings will be 60% lower than a year earlier, Citigroup's stock went up. Investors appear to have been reassured by Chief Executive Charles Prince's comment that he expects "a return to a normal earnings environment in the fourth quarter."

Citigroup is hardly alone and in fact led a parade of similar warnings culminating Friday with nasty news from Washington Mutual
WM, +0.16%
and Merrill Lynch & Co.
MER, +0.32%
As with Citigroup, their stocks went up. This is investor and public relations at its best or worst, depending on your perspective.

Don't be fooled: At many companies like Citigroup, Washington Mutual and Merrill especially when the news isn't good the message is orchestrated with great care and precision. When the CEO is a lawyer, as is Prince, you can bet that every word has been scrutinized. Which raises several interesting points.

First, among things not said at Citigroup: There was no mention of 2008 and no explanation of the word "normal," and a spokeswoman declined to elaborate. However, normal quarterly earnings for Citigroup, other than an unusually strong second quarter, have been about $1 a share, give or take a few pennies. Analysts are expecting earnings of $1.10 a share in the fourth quarter. That is a penny below what they were anticipating for the third quarter, an estimate which has since been revised down to 47 cents a share.

Next, despite the timing, the guillotine that Citigroup took to its earnings guidance wasn't just because of the mortgage mess. The company blamed it largely on $5.9 billion in unexpected losses and charges. A little more than half were from such things as subprime-mortgage-backed securities and "fixed income credit trading" - the kind of hits you would expect from a credit and mortgage meltdown.

But the rest reflected increases in consumer-credit costs in the form of higher losses and reserves on the likes of home-equity loans, mortgages and credit cards. This isn't a new issue for Citigroup, which a quarter ago warned that consumer-credit costs would be rising in the third quarter. The company, however, didn't say by how much. In other words, mortgage mess or no mortgage mess, earnings still might have missed expectations. The spokeswoman declined to comment.

Then there was the conference call, or lack thereof. After making its announcement, rather than holding a call with investors, Citigroup offered up a brief prerecorded message, with more detail, from Prince and Chief Financial Officer Gary Crittenden. That is one way to avoid answering tough questions. Writing on Deal Journal, a blog on WSJ.com, The Wall Street Journal's Dennis Berman said it was "almost like a Politburo shunning the world around it." The spokeswoman says the company went the prerecorded route "because we wanted to get information out quickly and efficiently."

That brings up something else: The release of earnings, and a live question-and-answer session with analysts, has been pushed up to early on the morning of Monday, Oct. 15, from Friday, Oct. 19, making it among the first of the big banks rather than one of the last to post earnings during the week when most money-center banks are expected to report.

The spokeswoman says Citigroup pushed up the date because in the wake of the warning, "we just wanted to get it out as quickly as we could." That makes sense, but it also accomplishes something else: By going first, Citigroup also can avoid getting asked tougher questions by analysts armed with comparisons from the results and commentary of competing banks.

Even if that wasn't the goal, and was never part of the thought process, somebody at Citigroup should take credit for it because it is genius if the idea is to keep the spin as positive as possible. Which gets us back to where we started: Don't just be on the lookout for what they say, but also what they don't.

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